TMI Blog2010 (10) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... is promoted primarily by two Japanese Companies which are M/s Denso Corporation, Japan and M/s Sumitomo Corporation, Japan. These two companies had share holding 47.93% and 10.27% respectively. Even M/s Sumitomo Corporation, Japan is an associate company of M/s Denso Corporation, Japan. Thus, these two companies have an overall share holding of 58.20% which is sufficient to exercise overall management and control over the assessee company. However, that is not a relevant consideration for the issue involved in the instant appeal. 3. Here, we are concerned with the assessment year 2001-02. For this year, the respondent assessee had filed return declaring income at ₹ 14,77,51,457/-. During the assessment proceedings, the Assessing Officer noticed that the assessee had deposited ₹ 371.60 lacs on technical know-how fees. In addition, the assessee had also made payment of ₹ 77,03,487/- for the knowhow taken as part of the plant and machinery. The break-up of the entire know how fee paid is as under:- "S.No. Nature of payment Amount Remarks 1. Acquisition of know how 3,08,14,000 Being 80% of total know how fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to setting-up of the plant or machinery but related to the process of manufacturing and as such the assessee did not obtain any asset of enduring nature. Know how acquired by the assessee explained only the production process and it did not result in the acquisition of any capital asset. Provisions of Section 32 amended with effect from 1st April, 1998 cannot be extended to treat the revenue expenditure as capital expenditure eligible for depreciation. The instant appeal filed by the revenue was admitted on 6.9.2010 on the following substantial question of law:- "A. Whether the ITAT was justified in law in holding that the amount of ₹ 63,46,000 paid by the assessee for acquiring technical know-how was allowable as revenue expenditure? B. Whether expenditure incurred by the assessee for acquisition of technical know-how was a revenue expenditure or a capital expenditure eligible for depreciation under Section 32 of the Act?" 5. As the counsel for the parties were ready to argue the matter finally at a short date, the case was listed for arguments on 14th September, 2010 on which date the arguments were heard and judgment reserved. With this background, we pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such products; Whereas, Denso India Ltd. (DNIN) has been engaged in the manufacture and sale of some of automotive electrical and electronic equipment, and has to meet all requirements of its local customers in supplying them any products ordered by them. Whereas, DNIN is not in a position to develop or design new products to suit the specific requirements of its customers therefore, DNIN has requested DNJP and DNJP has agreed to make new design (s) or carry out new application work regarding such products on behalf of DNIN. Now, therefore, the parties hereto agree to the following terms and conditions: Article 1: Definitions For the purpose of this Agreement, the following terms shall have the following meanings: (1) "products" shall mean products which are manufactured or to be manufactured in future by DNIN specified in Annexure 1. (2) "Application works" shall mean the modification or application or design works regarding the products, or works for planning manufacturing process and/ or lines or other work, which are required to make the basic underlying technology compatible with the Indian conditions and customer specific requirements, and which, upon request by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case a new company was being formed to manufacture the product which was hitherto being manufactured by the foreign collaborators and imported by the Indian partners, that is, Gannon Dunkerley Company Ltd. It is, however, to be remembered that in Telco's case [1980]123ITR538(Bom) the agreement with Messrs Daimler Benz was for manufacturing trucks which were not at all being manufactured by Telco at the time of the collaboration agreement. Telco was up to the time of this collaboration only making locomotives and for its new proposed activity, namely, for the manufacture of trucks, it set up a new factory after obtaining know-how from its German collaborators, which collaboration was being considered by the High Court. In principle, it would seem to make no difference between a case where an existing company undertakes a totally new line of activity for which it has to establish a new factory, and a case where for manufacturing a new product a new company is constituted or formed. What we have to consider is whether the payment has been made for acquiring an asset of an enduring nature. If know-how has been acquired unrelated to secret or patented processes or the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we deem it appropriate to point out that the judgment of the Tribunal in TEI Technologies (supra ) has been upheld by this Court in the case of Commissioner of Income Tax Vs. TIE Technologies, 304 ITR 262. While holding that no question of law arises and dismissing the appeal on that ground, this Court observed:- "There is a finding of fact given by the Tribunal that all that the assessed received was technical assistance in the manufacture of the products. There was no transfer of technology or knowhow etc. which would enable the assessed to set up its plant and machinery.. In Gannon Norton Metal Diamond Dies Ltd. v. CIT [1987]163ITR606, the Bombay High Court held that if the knowhow acquired relates to the process of manufacture, then any payment made for this purpose would have to be considered as a revenue expenditure since the acquirer does not obtain any asset of an enduring nature it is more in the nature of a payment for consultancy. In so far as the present case is concerned, we find that the only service that was rendered to the assessed was in relation to the process of manufacture. Even assuming that this would give the assessed an advantage of an enduring nature, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings furnished by M/s Denso Corporation, Japan, could be treated as "plant" under Section 32 (1) (i) of the Act and, therefore, the expenditure was to be termed as capital in nature warranting depreciation thereupon. 12. In the case of the CIT Vs. Elecon Engineering Co. Ltd. 96 ITR 672 the Court held as under:- "Know-how is a peculiar kind of asset. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form, as it grows, in the shape of formulae, drawings, patterns, blue-prints, specifications and so on. The material form it takes not only facilities preservation, collation and ready reference, but also makes it perceptible and visible and easily capable of being transmitted to others. The books, which one consults to inform one's mind and thereby uses them in the course of one's business or provision, are expressly included within the meaning of the word "plant", there is no reason to exclude from the wide range of its meaning objects of similar nature as drawings, patterns, designs, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt since they were in a sense the basic tools of the assessee's trade having a fairly enduring utility, though owing to technological advances they might or would in coarse of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs charts, plans, processing data and other literature falls within the definition of 'plant' and therefore a depreciable asset." 14. The meaning of the expression "plant" was also examined by the Apex court in the case of Scientific Engineering (supra) and it was, inter alia, held as under: "that "documentation service" comprised of drawings, designs, charts, plans, processing data and other literature, etc., and can be treated as "plant" and depreciation can be allowed thereon. That being the position, an obvious answer to the question is in the affirmative, in favor of the assessee and against the Revenue." 15. There is a clear fallacy in the aforesaid line of argument advanced by the learned counsel for the revenue. The attempt is to cover the payment under Section 32 of the Act and then to assert that it qualifies for depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to give benefit to the assessee had interpreted the expression "plant" very widely, as is clear from the reading of the extracted portion of the judgments referred to hereinabove. 18. By inserting Clause-(ii), in sub Section (1) of Section 32 of the Act, the Legislature has granted the benefit to the assessee, by providing depreciation in respect of capital expenditure incurred on know-how, patents,. copyright, trade mark etc. This also becomes clear from the memorandum explaining the provision in the Finance (No.2) Bill, 1998, reported in 231 ITR (St.) 28 at page 243 which reads as under:- "Depreciation to be allowed on intangible assets Under the existing provisions, depreciation is allowable when building, plant, machinery or furniture is used by the assessee for the purposes of his business or profession. It is proposed to widen the scope of this section so as to provide that depreciation will also be allowed where intangible assets are owned wholly or partly by the assessee and are used by such assessee for the purposes of his business or profession. Intangible assets, such as know-how, patent rights, copyrights, trade m arks, licences, franchises or any other busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussing the entire case law on the subject, the court culled out the broad principles to determine as to whether expenditure in a particular case would be capital or revenue expenditure. One of the principles enumerate therein reads as under:- (v) Expenditure incurred for grant of License which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the Licence. (b) the right, if any, in the licensee to create further rights in favour of third parties, (c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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